Over the next few blogs, I will discuss the concept of a new model and a new approach to fraud risk assessment. Two things to note. First, you must be open-minded to change. Second, it is not my goal to say that what we are doing is wrong. As with so many theories, change is necessary. Fraud in companies has evolved and we must be willing to evolve along with it.
In one sense, there is nothing new when it comes to misstatement of revenue in financial statements. With a little effort, you can find real-life examples of these schemes in both publicly traded companies and privately held companies. How the scheme is perpetrated may differ by industry or by company. How the scheme is concealed may differ by industry or by company. So, how can auditors uncover these schemes?
This year, we are focused on the fraud risk assessment process as both a management tool and an audit tool. The common theme of my blogs is, “Do you understand fraud risk?” I have raised a number of issues that I hope were helpful within your career as an auditor, investigator, risk manager, or senior leader.
This year, I have focused on the fraud risk assessment process as both a management tool and an audit tool. The common theme of my blogs is, “Do you understand fraud risk?” I have raised a number of issues that I hope were helpful within your career as an auditor, investigator, risk manager, or senior leader. In this blog, we’re diving into what having a deeper understanding looks like.
Where is the beef?
If that phrase doesn’t instantly resonate, take a look at this video. This was an iconic video from the 80s, and people are still asking the question today. (I hope you get my sense of humor.)
In the beginning of my career, someone once told me, "People commit fraud, not internal controls." So, if we are to perform a proper analysis of fraud risk, then we need first to assess people. No, I do not mean a psychological profile. To me, it means the opportunity the person has by virtue of the position in the business cycle. Or by their sophistication to conceal the fraud scheme. Or, by understanding the natural vulnerabilities that exist within their business system.
This will be the summer of challenging our profession’s guidance on fraud risk assessment. As you know, last month we raised the question of whether fraud risk assessment is simply an academic process to meet a standard.
Fraud risk assessment is alleged to be an essential part of protecting a company, but is it just an academic exercise?
Please be advised, I will not be providing a job description of a Fraud Auditor. Rather, the thought process that is necessary to find the right person, with the right skill set.
I know this is a good technical question, but I do not know if there is a good technical answer. With that said, my suggestion to the CAE’s of the world would be to look for someone with the “Passion for the subject knowledge of fraud risk.” The passion would be for both the science of fraud risk and the passion for the practical application of fraud auditing. I say this because, with any new profession, the person must have the passion to create, build, and polish the fraud audit approach. I am sure that this person will get pushback from the traditional auditor. I know I have.
Before I start, let me explain that in this blog I will not provide any answers to the phrase “Deeper Understanding of Fraud Schemes.” Rather, I will only raise questions regarding the phrase. To be honest, If I was a CAE, I am not sure what the profession wants me to do.
With that said, I praise the profession in recognizing the importance of gaining a deeper understanding of fraud schemes facing our companies. Maybe, I am talking out of both sides of my mouth. Remember, my blogs are designed to make you think.
So, think about this: Fraud is not predictable as to when it will occur but is fairly straight forward as to how it will occur.
